Liquidity Surplus in Indian Banking System Crosses Rs 1.75 Trillion, Boosted by Government Spending

The Reserve Bank of India (RBI) has released its latest data revealing that liquidity surplus in the Indian banking system soared past Rs 1.75 trillion at the end of May. This significant increase is attributed to the higher government expenditure during the period. On Wednesday, the surplus liquidity stood at approximately Rs 1.76 trillion, surpassing Tuesday’s amount of about Rs 1.35 trillion. The banking system has consistently maintained a surplus of over Rs 1 trillion in recent days.

Gaura Sengupta, an India economist at IDFC First Bank, explained that the improved liquidity conditions by the end of May can be attributed to the usual pattern of increased government spending, which often includes salary payments towards the month-end. Additionally, measures such as the reduction in currency leakage, with currency in circulation decreasing by Rs 13,300 crore between April 28 and May 26, have helped alleviate liquidity pressures throughout May.

The surplus liquidity has had a cooling effect on overnight rates, with Thursday’s rate dropping to 6.15 percent. According to data from the Clearing Corporation of India, the weighted average call rate on Thursday was recorded at 6.32 percent, slightly lower than the previous day’s rate of 6.33 percent.

Another factor contributing to the rise in liquidity surplus may be the central bank’s intervention in the foreign exchange market, particularly in the first half of May. In recent weeks, the RBI has been purchasing foreign currencies to inject rupee liquidity into the system. This intervention has also resulted in a rise in foreign exchange reserves, although there was a decline in reserves for the week ending May 19 after two consecutive weeks of growth.